the municipal bond market in the aftermath municipal bond club of baltimore september 25, 2008
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The Municipal Bond Market in the Aftermath Municipal Bond Club of BaltimoreSeptember 25, 2008
Presented by: Anirban Basu, CEO
Sage Policy Group, Inc.Morris Segall, President
SPG Trend Advisors
Historic and Projected World Output Growth, 2004 through 2009*
Source: International Monetary Fund
*2008-2009 data are projections
Estimated Growth in Output by Select Global Areas, 2008
Source: International Monetary Fund
University of Michigan Consumer Sentiment SurveySeptember 2001 through August 2008
Source: University of Michigan; Dismal.com
Between Aug. 2005 and Sept. 2005, the consumer sentiment index dropped 12.2 points, the largest one-month decline sinceDecember 1980.
Retail & Food Services SalesJanuary 2001 through August 2008
Source: Dismal.com
CPIAugust 2008
Source: Bureau of Labor Statistics
CPI : +5.4%
Core CPI*: +2.5%
*Core CPI: All items less food and energy
15-Year & 30-Year Fixed Mortgage Rates January 1995 through September 2008
Source: Freddie Mac
U.S. New Home SalesJanuary 1999 through August 2008
Source: Economy.com, Census Bureau
Change in Unit Sales by Maryland JurisdictionAugust 2007 vs. August 2008
County Aug 08 Aug 07 % Chg
Garrett 40 37 8.1%
Talbot 39 40 -2.5%
Queen Anne’s 49 53 -7.5%
St. Mary’s 102 112 -8.9%
Frederick 201 222 -9.5%
Howard 275 304 -9.5%
Dorchester 20 23 -13.0%
Cecil 76 89 -14.6%
Washington 89 106 -16.0%
Montgomery 787 963 -18.3%
Wicomico 67 86 -22.1%
Harford 226 295 -23.4%
County Aug 08 Aug 07 % Chg
Worcester 100 134 -25.4%
Anne Arundel 433 594 -27.1%
Prince George’s 430 611 -29.6%
Baltimore County 577 842 -31.5%
Allegany 45 67 -32.8%
Caroline 18 27 -33.3%
Baltimore City 430 662 -35.0%
Carroll 106 171 -38.0%
Charles 97 175 -44.6%
Calvert 51 104 -51.0%
Kent 10 24 -58.3%
Somerset 1 15 -93.3%
Source: Maryland Association of Realtors
MD: -25.8% in August 2008
Source: Economy.com, Bureau of Labor Statistics
Net Change in U.S. JobsJanuary 2000 through August 2008
8/08: -84k
Over the last 12 months(Aug. to Aug.) the U.S.
lost 283k jobs
National Nonfarm Employmentby Industry Sector GroupsAugust 2007 v. August 2008Absolute Change
Source: Bureau of Labor Statistics
-283k All Told
Bush ScorecardPrivate Sector: +3,353,000 Public Sector: +1,651,000
Total: +5,004,000
Unemployment Rates, U.S. States (SA) August 2008
Source: Bureau of Labor Statistics
Rank State Rate Rank State Rate Rank State Rate
1 South Dakota 3.3 18 Arkansas 4.8 35 Connecticut 6.5
2 Nebraska 3.5 19 Alabama 4.9 35 Florida 6.5
3 North Dakota 3.6 19 Delaware 4.9 35 Oregon 6.5
4 Utah 3.7 19 Vermont 4.9 38 Missouri 6.6
5 Wyoming 3.9 22 Texas 5.0 38 Tennessee 6.6
6 Oklahoma 4.0 23 Wisconsin 5.1 40 Kentucky 6.8
7 West Virginia 4.1 24 Massachusetts 5.3 41 Alaska 6.9
8 Hawaii 4.2 25 Colorado 5.4 41 District of Columbia 6.9
8 New Hampshire 4.2 26 Maine 5.5 41 North Carolina 6.9
10 Montana 4.4 27 Arizona 5.6 44 Nevada 7.1
11 Maryland 4.5 28 New York 5.8 45 Illinois 7.3
12 Idaho 4.6 28 Pennsylvania 5.8 46 Ohio 7.4
12 Iowa 4.6 30 New Jersey 5.9 47 South Carolina 7.6
12 New Mexico 4.6 31 Washington 6.0 48 California 7.7
12 Virginia 4.6 32 Minnesota 6.2 48 Mississippi 7.7
16 Kansas 4.7 33 Georgia 6.3 50 Rhode Island 8.5
16 Louisiana 4.7 34 Indiana 6.4 51 Michigan 8.9
•U.S. unemployment rate: August=6.1%
IMPLICATIONS
Total Municipal Bond Debt Outstanding•Latest estimates place debt outstanding at $2.66 trillion.
Source: S&P All Muni Index
G.O. Municipal Bonds
Bloomberg Daily Generic OAS Yields, 9/23/2008AAA
(Sect. 49)AA
(Sect. 104)A
(Sect. 159)BAA1
(Sect. 631)AAA as % of Current US
Gov’s
1 YR 2009 1.95 2.05 2.42 2.95 99.25
2 YR 2010 2.33 2.42 2.82 3.16 116.35
3 YR 2011 2.62 2.76 3.13 3.39 109.82
4 YR 2012 2.84 2.99 3.33 3.62 102.35
5 YR 2013 3.04 3.17 3.54 3.86 102.46
7 YR 2015 3.41 3.54 3.87 4.32 102.67
9 YR 2017 3.79 3.90 4.25 4.75 104.25
10 YR 2018 3.96 4.07 4.42 4.95 104.41
12 YR 2020 4.28 4.42 4.80 5.31 108.80
14 YR 2022 4.55 4.67 4.99 5.60 111.65
15 YR 2023 4.64 4.77 5.09 5.72 111.91
17 YR 2025 4.75 4.88 5.23 5.91 110.79
19 YR 2027 4.85 5.00 5.34 6.03 109.51
20 YR 2028 4.87 5.03 5.38 6.07 108.24
25 YR 2033 5.05 5.20 5.56 6.07 113.96
30 YR 2038 5.07 5.20 5.56 6.07 116.20Source: Bloomberg
Market UpdateThe municipal bond market was a casualty of the current credit crisis with yields uncharacteristically exceeding comparable Treasury issues.As the credit crisis wore on, investors increasingly shunned risk.Housing issues suffered from the mortgage market meltdown. Insured issues suffered from the credit downgrades and losses of municipal bond insurers.
Market Update (cont.)Long term bond issuance through August was virtually flat with 2007 at approximately $295 billion.New bond issuance was strongest in Development, Environment, Health Care, Transportation and Utilities. Not surprisingly new issue weakness was led by housing followed by general purpose and education sectors.
Market Update (cont.)
In addition, variable rate (short put) issues saw the biggest increase (+220%) in year over year volume.Concurrently, issues backed by Letters of Credit increased by over 370% year to year from $10.9 billion to over $52 billion.While Long term bond issuance was virtually flat through August, municipal note issuance increased over 14% to over $36 billion at the end of August.
Market Update (cont.)
Safety was also a principal objective as issues backed by letters of credit and with variable rates (short put) increased substantially from 2007 levels.Leading sectors in note finance this year have been General Purpose and Education sectors.New money financing represented the bulk of note issuance while refundings represented the bulk of long term bond issuance this year.
OutlookWhile the municipal bond market seems to have stabilized with the redemption of auction rate preferred issues by brokerage firms, the market will need the full government “bailout” to provide more stable liquidity.Investors continue to be risk averse and will stress safety of principal and liquidity.State and local government finances are facing increased budget deficits from revenue shortfalls and are also facing limits on new bond issuance.
Outlook (cont.)
Increasingly programs will have to be cut.Many states have already raised taxes and property tax increases have peaked.We expect an increase in downgrades of state and local government credit ratings and in the credit ratings of agency and revenue bond issues.We expect interest rates to rise as a result of an increase in U.S. Treasury interest rates from increased deficit
Outlook (cont.)
Conversely, we expect either a repeal or major adjustment in the AMT tax that would benefit municipal bond investment.
Likewise a rise in Federal income taxes which we expect will also increase the attraction of municipal securities.
Conclusion
In conclusion, the municipal bond market will face increasing supply from financially stressed issuers but increasing demand from investors seeking tax avoidance.
However, investor selection of municipal debt will be more discriminating.
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